Tuesday, February 10, 2009

Economists React: Treasury Announcement Fails to Satisfy

From the Wall Street Journal's Real Time Economics blog:

The concept of a public/private investment fund sounds intriguing, but there is no plan - the Treasury Secretary “seeks input” how to achieve this. There simply is no fair way to take bad assets off the books of financial institutions. The sooner policy makers not just recognize it, but embrace it in their strategy, the better… We did not see convincing evidence that the government is moving away from its Band-aid approach to helping banks. By now, the only viable solution left may be to nationalize the financial institutions that are deemed to big to fail; it’s then a political decision whether depositors should carry part of the cost. –Axel Merk, Merk Investments

The “comprehensive” financial rescue plan — Financial Stability Plan — released by Treasury Secretary Geithner this morning is still missing significant detail, including an implementation date. There are far too many missing details to make this a satisfying announcement. Nonetheless — at first blush and without the benefit of key detail — the plan does appear to address the key problems of the financial markets at this point in time. –Ward McCarthy, Stone & McCarthy...and three MORE

RTE also has the text of Secretary Geithner's remarks (the first few hundred words are political boilerplate):

...Under this framework, we are establishing three new programs to clean up and strengthen the nation’s banks, bring in private capital to restart lending, and to go around the banking system directly to the markets that consumers and businesses depend on.Let me describe each of these steps:

First, we’re going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term. We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it.

To do this, we are going to bring together the government agencies with authority over our nation’s major banks and initiate a more consistent, realistic, and forward looking assessment about the risk on balance sheets, and we’re going to introduce new measures to improve disclosure.

Those institutions that need additional capital will be able to access a new funding mechanism that uses funds from the Treasury as a bridge to private capital. The capital will come with conditions to help ensure that every dollar of assistance is used to generate a level of lending greater than what would have been possible in the absence of government support. And this assistance will come with terms that should encourage the institutions to replace public assistance with private capital as soon as that is possible.

The Treasury’s investments in these institutions will be placed in a new Financial Stability Trust.

Second, alongside this new Financial Stability Trust, together with the Fed, the FDIC, and the private sector, we will establish a Public-Private Investment Fund. This program will provide government capital and government financing to help leverage private capital to help get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions....MORE